Shares plunged on Wall Street and the dollar fell sharply tonight after an increase in jobless claims and weak signals from industry prompted fears that the US is heading for a double-dip recession.

The Dow Jones index fell 200 points at one stage in morning trading in New York after the US labour department reported that 500,000 new claims for unemployment benefit were filed in the week ending 14 August – an increase of 12,000 on the previous week and the highest figure for nine months.

The already gloomy mood was compounded when the Philadelphia Fed, one of the Federal Reserve's 12 regional reserve banks, published its monthly health check on manufacturing in America's mid-Atlantic region. The survey, seen by Wall Street as a barometer of US industrial conditions, showed activity had contracted unexpectedly for the first time since July 2009.

President Barack Obama called on Congress to pass a bill providing support for small businesses, but Wall Street believes the threat to the world's biggest economy will also require action by the Federal Reserve to expand the money supply through its quantitative easing programme. James Bullard, president of the St Louis Fed, said tonight that the central bank would need to step up its purchases of bonds should the threat of deflation intensify.

On the foreign exchanges, the dollar fell to its lowest level in 15 years against the Japanese yen, while bond yields around the world fell as investors predicted that weak growth would keep inflation low. In Britain, the yield on the benchmark 10-year gilt dropped below 3% for the first time since global financial markets hit their trough in March 2009.

Jeremy Cook, chief economist at commodity exchange broker World First, said: "This will further heighten fears that the US economy is careering into the dreaded double-dip recession."

Concerted action by the Federal Reserve and the US Treasury prompted a recovery in the US economy in the second half of 2009, but the White House has become increasingly concerned by evidence of a relapse in recent months. The fourth increase in jobless claims in the past five weeks has coincided with a sharp drop in Obama's approval ratings.

Homebuilders and other construction firms have been laying off more workers as the housing sector slumps after the expiration of a popular homebuyers' tax credit. State and local governments are also cutting jobs to close large budget gaps caused by the drop in property taxes as repossessions rise and housing transactions remain at a low level.

While the survey from the Philadelphia Fed only covers eastern Pennsylvania, southern New Jersey and Delaware, analysts believe it provides an early pointer to the overall state of US manufacturing, details of which will be published early next month. The reserve bank's business activity index fell to -7.7 in August from +5.1 in July. Any reading below zero indicates shrinking manufacturing output.

Paul Ashworth at Capital Economics said the news was "nothing but awful", adding: "The collapse in the Philly Fed activity index suggests the industrial recovery is teetering on the brink."